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A new report provides firm evidence to support the notion that rising barriers to entry are making life much more difficult for smaller hedge funds.

The research by Citi Prime Finance charts how the breakdown of expenses evolves as funds grow and provides a valuable insight into the costs involved in running your own hedge fund.

Citi Prime Finance surveyed more than 80 hedge fund firms representing $186bn in assets under management, or 8.5% of total industry assets.

The research breaks down the expenses involved as funds grow, and gives facts and figures to support the idea that life is getting tougher for smaller funds.

Here are 10 important takeaways from the report:

1) It takes at least $250m in assets for a hedge fund to be self-sustaining on its management fees alone.

2) Hedge fund expenses totalled $14.1bn in 2012, the equivalent of 65 basis points of total industry assets. These expenses included costs associated with marketing, investor relations, risk and compliance, operations and technology, and business management but don’t include compensation costs for investment management.

3) Individual managers would have to divert about a third of the industry’s traditional 2% management fee to cover these costs. In reality the figure would be higher, says Citi, because of the exclusion of compensation costs.

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4) Year-on-year technology spend on internal resources, hardware, software, data and third party IT services is expected to increase 14% to $2.3bn versus the $2.1bn listed in Citi’s Trends and Benchmark Survey last year.

5) Small hedge funds (under $250m) are expected to average costs of $2.5m in 2010, of which compensation (ex-portfolio management personnel) will account for 37% and third-party expenses account for 63%. The technology portion of their total spend is anticipated to be just under $300,000, or 12% of their total spend.

6) Medium hedge funds (between $250m and $1bn) spend twice as much on average at $5.1m and their ratio of expenses shifts as compensation accounts for 57% of expenses while third-party expenses represent 43%. Technology spend rises to an average of $780,000 per year or 15% of total spend.

7) For large hedge funds (between $1bn and $5bn), their average spend doubles to $10.1m and their ratio of expenses is evenly split, with compensation at 51% and third-party expenses at 49%. Given the increased scrutiny from regulators and institutional investors that these managers face, their technology spend increases to $1.9m on average, or 18% of total spend.

8) Franchise-sized firms (over $5bn) show exponential growth in costs, jumping nearly six times to $63.1m hedge funds. The report explained: “The majority have begun to manage different types of products, with hedge funds being just one component of their offerings. Also, the majority of these firms also have a global investment focus and presence. The increased complexity of their business operations and increasing size of their organisations both combine to drive costs sharply higher.” For franchise-sized firms, compensation accounts for a third of expenses, and third-party costs for the rest. Technology costs jump to $12.5m per year, or 20% of total spend.

9) Operations and technology expenditures absorb the highest share of a hedge fund’s costs, regardless of size. These expenditures show an inverse pattern from business management, rising as a percentage of overall spend as assets under management grows. The report said: “Small hedge funds on average allocate 40% of their expenses to operations and technology. This grows to 44% for medium-sized firms, 49% for large managers and 54% for franchise organisations.

10) The average small manager respondent with $124m assets under management spent 198 basis points – nearly equivalent to the standard 2% management fee – to cover their expenses, excluding compensation for investment professionals. This is “one of the most concerning findings”, said the report: “Many organisations have anecdotally described the rising barrier to entry that increased institutionalisation and regulation of the industry has wrought, and these figures demonstrate the burden that small hedge fund managers face.”